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Oil settles lower on concerns about global demand

THE latest readings on Chinese inflation and renewed worries about European debt pushed oil lower.

Benchmark West Texas Intermediate crude fell US$1.05 to settle at US$95.15 per barrel yesterday on the New York Mercantile Exchange. Brent crude, which is used to price many international oil varieties, dropped US$1.09 to settle at US$117.24 per barrel on the ICE Futures exchange in London.

Oil started falling after a weekend announcement that inflation in China hit a three-year high in June. China has been raising interest rates in an attempt to control inflation and cool off its economy, but on Saturday the government said consumer prices continued to increase, jumping 6.4 percent last month.

Rising consumer prices will heap even more pressure on the country's expanding economy, and that could affect energy demand. Oil has been climbing all year on the expectation that China will drive world oil demand.

Meanwhile, European officials disagreed over a second bailout package for Greece. Uncertainty about the country's debt problems raised concerns that the economic crisis could spread to Italy and Spain.

"You combine the debt crisis in Europe with those (Greek) austerity measures, and you get less spending and therefore less demand" for oil, analyst Andrew Lipow said.

The dollar shot up against other currencies, and that also weighed on oil futures. Oil, which is traded in dollars, tends to fall as the dollar strengthens and makes crude barrels more expensive for investors holding foreign money.

Anxiety about the future of the global economy fueled a sell-off on stock markets as well. The Dow Jones Industrial Average fell almost 180 points in afternoon trading. The Nasdaq and the Standard and Poor's 500 Index were down as well.

Given renewed economic concerns in Europe, some analysts wonder why oil hasn't dropped further. If it weren't such a hot commodity for hedge funds, money managers and other passive investors, oil would be much lower than it is now, Cameron Hanover analyst Peter Beutel said.

"Nothing I'm seeing suggests oil should be as high as it is," Beutel said.

Economists point out that oil will stay elevated as long as Libya's 1.5 million barrels of daily exports remain off the market due to the uprising there. Also, a slowdown in oil exploration in the Gulf of Mexico, unrest in other oil-rich nations like Yemen and expanding demand among developing nations will keep pushing prices higher this year.

Investment bank Barclays Capital said last week that benchmark oil should rise to an average US$102 per barrel in the final three months of 2011. Chinese and Indian demand "remains highly strong" and "Latin America continues to be a source of demand strength," analyst Paul Horsnell said.

In other Nymex trading for August contracts, heating oil fell less than a penny to settle at US$3.0875 per gallon and gasoline futures gave up 2.21 cents to settle at US$3.0705 per gallon. Natural gas added 7.3 cents to settle at US$4.277 per 1,000 cubic feet.




 

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